about 2 years ago • 1 min
When it comes to energy, going dirty has been a lot more rewarding than going clean recently. In fact, the fossil fuel-based Energy Select Sector SPDR ETF (ticker: XLE) has smashed the iShares Clean Energy ETF (ticker: ICLN) by 37% so far this year.
There are a couple of key reasons why. First, clean energy has simply given up some of the astonishing gains it achieved in 2020. It reached a forward price-to-earnings (P/E) ratio of 45x in 2020, so it was arguably about time investors got real about its valuation. Second, dirty energy has been supported by the massive rally in crude oil prices, with companies like Exxon and Chevron – XLE’s two largest holdings) – benefiting handsomely.
Clean energy is still twice as expensive as dirty energy, with ICLN’s forward P/E of 30x compared to XLE’s 12x. But a gap of that size is easier to justify: the energy transition does open up huge growth opportunities for companies involved in the solar, wind, hydroelectric and geothermal industries, after all.
What’s more, XLE is benefiting from factors that may prove temporary, like the rally in oil prices and investors’ appetite for risk. The long-term trend, meanwhile, is still moving in favor of clean energy: the world needs a quick and efficient energy transition now more than ever.
Put another way, this might be a short-term reaction rather than long-term thinking, which might make now the perfect moment to buy the clean energy dip.
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